Pro-Rata Warranty pricing model with risk-averse buyers

Currently, a large number of products are being sold with warranty policies and product warranty has started playing an important role in today’s fiercely competitive products market. In this study, a model for determining the optimal price of PRW with fixed period presented. In designing this model, the rate of rectification costs in the product warranty period is affected by inflation rate, and customers are risk averse for future repair costs. The cost of failure is considered as a random variable and the failure rate of products as a function of time. Using the Exponential utility function, a model for determining the optimal warranty cost, based on risk averse buyers point of view, was developed. Furthermore, the sensitivity of the optimal warranty price is analyzed with a numerical example with respect to such factors as (1) the customer's risk preferences, (2) their perceptions about the product failure rate, and (3) the customer's repair price.